Real Property Gains Tax (RPGT) & The Property Owner
The 2012 Budget unveiled on 7 October 2011 included a revision of the Real Property Gains Tax (RPGT) rate from the 5% to 10% as part of the Government’s efforts to curb property speculation. The increase was recently gazetted and took effect from 1 January 2012 onwards. Jennifer Chang studies the impact of this move on property purchasers.
The rate of 10% applies to gains on properties held and disposed within two years while gains on properties held and disposed between two and five years will be levied a 5% RPGT rate and disposals after five years continue to be exempted from RPGT.
RPGT is a form of capital gains tax that is chargeable on gains arising from the disposal of real property, which is defined as:
• Any land situated in Malaysia and any interest, option or other right in or over such land; or
• Shares in a real property company. Anyone disposing of real property in Malaysia - whether a resident or non-resident - will be charged RPGT on the gains.
Evolution of RPGT
A tax on property was introduced in 1974 under the Land Speculation Tax Act. This was subsequently replaced with the Real Property Gains Tax Act in November 1975. Although in existence since the mid-70s, the Government pro-actively adjusted the rates of the RPGT through the years to cater to the property market conditions.
It’s natural for most people to react to the reintroduction of RPGT, having enjoyed full exemption for a few years previously, however, compared to the original rates of RPGT which range up to 30%, the recent hike of up to 10% is actually quite mild.
Impact on the Malaysian Property Owner
The disposal of a property takes place upon the signing and execution of a Sales & Purchase Agreement (SPA). The date of the SPA is significant, being the deadline to file RPGT returns and tax payments are based on SPA date. For example, the acquirer will need a 2% retention of the disposal price to be paid to the Inland Revenue Board of Malaysia (IRB) as part of a withholding mechanism on behalf of the seller of property and such withholding and filing of notification of disposal needs to be submitted to the IRB within 60 days from the date of SPA.
In conditional contracts which require Government consent, the date of disposal can shift to a later date than the SPA. Hence, the date of disposal shall be the date when Government consent has been obtained. Exemptions applicable to property disposals for a Malaysian individual include:
• An amount of RM10,000 or 10% of the chargeable gain (whichever is greater).
• Gain arising on disposal as a result of compulsory acquisition of property under law.
• Gain made by an individual who is a Malaysian citizen or permanent resident on one private residence.
• Gift made to the Government, State Government, local authority or approved charity.
• Gift between family members (e.g. parent and child or husband and wife).
Of importance is the fact that RPGT applies when property ownership is seen to be long-term capital. Where ownership is speculative, the IRB may view the disposal as revenue and seek to levy income tax instead. Income tax is levied at 25% for companies and up to 26% for Malaysian individuals. Of course, compared to income tax, the RPGT is preferable.
However, what is capital and what is revenue can be subjective and may depend on the property ownership and the taxpayer’s profile. For example, the sale of a residence after five years of ownership is more likely a capital transaction. On the other hand, the sale of an empty plot of land just subdivided for a project is likely to be treated as revenue.
What else do I need to know about RPGT?
Innovative property owners who have parcelled their properties in companies also need to be aware that the sale of shares in such companies may trigger RPGT. Remember, the definition of real property includes shares in a real property company, of which a substantial portion of their assets are properties.
The hike in RPGT rate from 5% to 10% is seen to be moderate and it is important to note that regionally, Malaysia is quite competitive. Countries such as the UK, Australia, New Zealand, Japan, Korea and India have some form of capital gains tax regime which could later extend to other types of assets as well. However, for some of our neighbours such as Singapore and Hong Kong, there is no capital gains tax regime on properties sold by resident individuals. We do hope that eventually, the RPGT rate in Malaysia will be relaxed, especially for Malaysian individuals.
Article contributed by Jennifer Chang, a Senior Executive Director with PricewaterhouseCoopers Taxation Services. She is a member of the Institute of Chartered Accountants in Australia, the Securities Institute of Australia and International Fiscal Association. Her extensive tax and financial services experience both in Australia and Malaysia enables her to regularly advise clients on various tax matters including income tax, real property gains tax, stamp duty, service tax, applicable tax incentives and double tax treaties. She can be contacted at firstname.lastname@example.org.